New FSA ‘Affordability’ Rules Could Trap Mortgage Borrowers

Work carried out by the economic and social research consultancy Policis suggests that around 19% of current borrowers would be prevented from remortgaging if the Financial Services Authority (FSA) presses ahead with new affordability measures. The independent research, commissioned by the Council of Mortgage Lenders (CML) also shows that around a further 30% of borrowers would see a reduction in the amount that they were allowed to borrow.

The group estimates that within the first year of the new rules being introduced as many as 483,000 homeowners looking to move and renters wanting to buy would be affected, with a further 150,000 potential buyers shut out completely. In addition to this, there would be further 380,000 would-be remortgagees affected. The group said that older self-employed workers, first-time buyers and those on low incomes would be hit the hardest. It also stated that the measure had the potential to impact 5.6 million homeowners, which is around half the country’s total.

So what are these measures that Policis seems to find so draconian? The FSA is proposing to ban self certification mortgages and introduce stringent affordability and income verification checks that lenders would have to carry out. Lenders would have to take into account future interest rate rises when assessing whether borrowers can afford their loan.
The responsible lending proposals put forward by the FSA under its Mortgage Market Review are supposed to address arrears and repossessions but Policis says that, if introduced, the measure will affect “on comparatively large numbers of current borrowers who never had any problems paying their mortgages.”

The CML have urged the FSA to re-consult on the draft rules for responsible lending and carry out a full impact analysis. The regulator was also asked to make an early announcement on the issue ahead of the deadline for the current consultation on November 16th. Further research commissioned by the CML showed that 45% of all people taking out a mortgage this year would have been affected if the proposed measures were currently in place.

The FSA defended its stance by stating that even a modest rise in interest rates could be disastrous as 46% of households had little or no money left over after paying their mortgage. It also pointed to the fact that there are currently 350,000 borrowers in arrears and 54,000 homes were repossessed last year. The regulator added that it continued to welcome feedback and that any changes would not be rushed into without assessing the market impact first.